The Investment Company Act of 1940
Congress passed this law to regulate investment companies' activities and create standards for the investment company industry. The Securities and Exchange Commission (SEC or Commission) enforces and regulates the Investment Company Act of 1940 (Act).
- Defines an investment company's responsibilities and requirements; and
- Outlines the requirements for publicly traded investment products offered.
The Act is primarily aimed at regulating publicly traded retail investment products.
Retail investors are non-professional investors. They buy and sell securities, mutual funds, and exchange-traded funds. Retail investors typically use brokerage firm investment accounts to execute their trades. They purchase securities for their personal uses. Their trading amounts are usually much smaller than institutional investors, such as fund managers who manage a mutual fund or pension fund.
The retail investment market is enormous. According to the SEC, retail investors in U.S. households own $29 trillion worth of equities – more than 58 percent of the market - through mutual funds, retirement accounts, and other brokerage accounts.
Although the SEC has broad powers and responsibilities in many securities law areas, it pays particular attention to protecting retail investors. It believes that they should be treated fairly and have access to relevant facts about investment options and those who sell them.
The SEC "protects investors by vigorously enforcing" the Investment Company Act to "hold wrongdoers accountable and deter future misconduct."
The SEC executes its enforcement of the Act in three ways:
- Administrative. Actions are adjudicated before an independent administrative law judge.
- Civil. Actions are brought in federal court.
- Criminal. The SEC does not directly conduct criminal prosecutions. Instead, it works with law enforcement agencies and U.S. Attorney's Offices.
Many common violations may get the SEC's attention. These include:
- Misrepresentation or omission of relevant information about securities;
- Manipulation of the market prices of securities;
- Theft of retail investors' funds or securities;
- Violation of a brokerage firm's responsibility to treat retail investors fairly;
- Insider trading; and
- Sale of unregistered securities.
The Commission indirectly collects evidence of potential violations through market surveillance, retail investor tips or complaints, industry sources, and even media reports.
The further collection is done directly. The SEC can issue subpoenas to compel witnesses to testify and to produce documents.
Once the SEC has concluded its investigation, it usually attempts to settle with the offending company. If settlement negotiations break down, the next step is an administrative court, federal court, or referral for potential criminal prosecution.
The Commission takes its enforcement seriously and has the track record to prove it. From 2016 to 2020, it:
- Carried out more than 3,000 enforcement actions.
- Obtained over $17 billion in judgments and orders.
- Returned nearly $4 billion to harmed investors.
- Awarded whistleblowers with approximately $600 million.
- Suspended the trading in securities of over 1,000 issuers.
One recent SEC complaint alleges Roger Karlsson, through his company Eastern Metal Securities, defrauded over 2,000 retail investors in almost every state in the United States and over 45 countries abroad. Over 800 of the defrauded investors were members of a community for the deaf. Mr.
Karlsson is alleged to have used $1.5 million in misappropriated funds for personal expenses and purchased property in Thailand.
Another Commission complaint concerns a Colorado man who may have defrauded investors using a Ponzi scheme. Milton Dosal, Jr. is alleged to have raised nearly $100,000 from about 40 investors. The SEC alleged he made material misrepresentations about securities and used fake stockholder agreements. Some of the alleged victims were Air Force Academy cadets.
Further complaints make allegations against:
- An investor adviser targeting members of the Haitian community using a Ponzi scheme.
- A Pennsylvania man defrauding members of the Amish and Mennonite communities.
- A New Jersey resident with a $5 million Ponzi scheme defrauded 90 investors, mostly Hispanic.
Careers for the Investment Company Act Attorney
There are a variety of career options in the public and private sectors.
Investment company act attorneys are employed by the SEC in its Washington, D.C. headquarters and 11 regional offices around the country.
Positions are available in several divisions and offices within the Commission.
Division of Corporate Finance
This division ensures that investors are provided with honest information so they can make informed decisions about investments.
The investment company act attorney reviews company disclosures for inconsistency with SEC rules. If deficiencies are found, the attorney works with the company to achieve better compliance with requirements.
This can include revisions of financial statements and other disclosures. Suppose you cannot compliance achieved by working with the business. In that case, the lawyer may refer the matter to the Division of Enforcement.
The investment company act lawyer in the Division of Corporate Finance also provides legal advice to the Commission. They recommend new rules or modifications of existing rules to further the SEC's objectives better.
Division of Examinations
This division's mission is to protect investors and ensure market integrity. The investment company act attorney uses risk-focused strategies to improve compliance, monitor risk, and prevent fraud. The lawyer uses the results of this effort to inform rule-making initiatives and improve industry practices. Where appropriate, misconduct may be referred to the Division of Enforcement.
Division of Enforcement
Investment company act lawyers in this division enforce the Act through the procedures discussed above. This includes issuing subpoenas to gather information and filing complaints in administrative or federal court, or referring the matter to prosecutorial authorities.
Office of Administrative Law Judges.
Experienced investment company act lawyers can become administrative judges for the Commission. These judges conduct hearings, similar to federal district court trials, throughout the nation.
All this SEC activity keeps private investment firms busy.
They need investment company act attorneys to work with the SEC, listening to its concerns, and responding to any of the many subpoenas that the Commission can issue for the production of documents and other information.
If the matter results in SEC enforcement, then the investment company act attorney handles the defense or hires outside counsel.
Investment company act lawyers can work in private practice as civil defense lawyers. They represent investment companies against SEC enforcement actions in administrative or federal court.
Suppose the SEC refers an enforcement matter to the U.S.
Attorney's Office. In that case, the investment company act lawyer represents the defendant investment company in a federal criminal trial.
Most of the Investment Company Act is enforced through the SEC and U.S. Attorney's Offices. However, the Act authorizes private rights of action.
First, the Act expressly permits mutual fund shareholders to file claims against investment advisors for excess advisory fees.
Second, the U.S. Court of Appeals for the Second Circuit has recently ruled that the Act creates an implied right of action. It provides contracting parties a right to rescind contracts that allegedly violate the Act.
Both rights of action can lead to lawsuits that require the services of an investment company attorney, either as a plaintiff's lawyer or as defense counsel.
Law School Professor
Lawyers with experience working in investment companies or those who enforced or litigated investment company-related issues can become law school professors specializing in securities law. Several graduate law programs provide degrees in securities-related areas of the law.
How do I Become an Investment Company Act Lawyer?
To be an investment company act lawyer, you first must understand business and securities. So, an undergraduate degree in business is a good start. Another option is to get work experience at an investment firm before entering law school. Finally, for those with a J.D., graduate certificates and degree programs are specializing in securities law. Armed with this education and experience, you'll be in an excellent position to pursue a career as an investment company act attorney.
Read these articles for more information:
- The Use of Testimonials and Endorsements in Your Job Search.
- You Need to Be Relevant to Your Employer.
- Employers Want to Hire You.
- Find an Employer with Similar Values.
About Harrison Barnes
Harrison Barnes is a prominent figure in the legal placement industry, known for his expertise in attorney placements and his extensive knowledge of the legal profession.
With over 25 years of experience, he has established himself as a leading voice in the field and has helped thousands of lawyers and law students find their ideal career paths.
Barnes is a former federal law clerk and associate at Quinn Emanuel and a graduate of the University of Chicago College and the University of Virginia Law School. He was a Rhodes Scholar Finalist at the University of Chicago and a member of the University of Virginia Law Review. Early in his legal career, he enrolled in Stanford Business School but dropped out because he missed legal recruiting too much.
Barnes' approach to the legal industry is rooted in his commitment to helping lawyers achieve their full potential. He believes that the key to success in the legal profession is to be proactive, persistent, and disciplined in one's approach to work and life. He encourages lawyers to take ownership of their careers and to focus on developing their skills and expertise in a way that aligns with their passions and interests.
One of how Barnes provides support to lawyers is through his writing. On his blog, HarrisonBarnes.com, and BCGSearch.com, he regularly shares his insights and advice on a range of topics related to the legal profession. Through his writing, he aims to empower lawyers to control their careers and make informed decisions about their professional development.
One of Barnes's fundamental philosophies in his writing is the importance of networking. He believes that networking is a critical component of career success and that it is essential for lawyers to establish relationships with others in their field. He encourages lawyers to attend events, join organizations, and connect with others in the legal community to build their professional networks.
Another central theme in Barnes' writing is the importance of personal and professional development. He believes that lawyers should continuously strive to improve themselves and develop their skills to succeed in their careers. He encourages lawyers to pursue ongoing education and training actively, read widely, and seek new opportunities for growth and development.
In addition to his work in the legal industry, Barnes is also a fitness and lifestyle enthusiast. He sees fitness and wellness as integral to his personal and professional development and encourages others to adopt a similar mindset. He starts his day at 4:00 am and dedicates several daily hours to running, weightlifting, and pursuing spiritual disciplines.
Finally, Barnes is a strong advocate for community service and giving back. He volunteers for the University of Chicago, where he is the former area chair of Los Angeles for the University of Chicago Admissions Office. He also serves as the President of the Young Presidents Organization's Century City Los Angeles Chapter, where he works to support and connect young business leaders.
In conclusion, Harrison Barnes is a visionary legal industry leader committed to helping lawyers achieve their full potential. Through his work at BCG Attorney Search, writing, and community involvement, he empowers lawyers to take control of their careers, develop their skills continuously, and lead fulfilling and successful lives. His philosophy of being proactive, persistent, and disciplined, combined with his focus on personal and professional development, makes him a valuable resource for anyone looking to succeed in the legal profession.
About BCG Attorney Search
BCG Attorney Search matches attorneys and law firms with unparalleled expertise and drive, while achieving results. Known globally for its success in locating and placing attorneys in law firms of all sizes, BCG Attorney Search has placed thousands of attorneys in law firms in thousands of different law firms around the country. Unlike other legal placement firms, BCG Attorney Search brings massive resources of over 150 employees to its placement efforts locating positions and opportunities its competitors simply cannot. Every legal recruiter at BCG Attorney Search is a former successful attorney who attended a top law school, worked in top law firms and brought massive drive and commitment to their work. BCG Attorney Search legal recruiters take your legal career seriously and understand attorneys. For more information, please visit www.BCGSearch.com.
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Harrison also does a weekly free webinar with live Q&A for law firms, companies, and others who hire attorneys each Wednesday at 10:00 am PST. You can sign up for the weekly webinar here: Register on Zoom
You can browse a list of past webinars here: Webinar Replays
You can also listen to Harrison Barnes Podcasts here: Attorney Career Advice Podcasts
You can also read Harrison Barnes' articles and books here: Harrison's Perspectives
Harrison Barnes is the legal profession's mentor and may be the only person in your legal career who will tell you why you are not reaching your full potential and what you really need to do to grow as an attorney--regardless of how much it hurts. If you prefer truth to stagnation, growth to comfort, and actionable ideas instead of fluffy concepts, you and Harrison will get along just fine. If, however, you want to stay where you are, talk about your past successes, and feel comfortable, Harrison is not for you.
Truly great mentors are like parents, doctors, therapists, spiritual figures, and others because in order to help you they need to expose you to pain and expose your weaknesses. But suppose you act on the advice and pain created by a mentor. In that case, you will become better: a better attorney, better employees, a better boss, know where you are going, and appreciate where you have been--you will hopefully also become a happier and better person. As you learn from Harrison, he hopes he will become your mentor.
To read more career and life advice articles visit Harrison's personal blog.